These big banks made the changes very soon after lawmakers announced an intention to try to regulate the extent to which customers are punished for spending money they don’t have.

Here’s a summary of the changes already made:

Opt out?

Max dailyoverdrafts

Balance to triggeroverdraft fee

Bank of America

Yes

4

-$10 *

Chase

Yes

3

-$5

Wells Fargo

Yes

4

-$5

* Fee will also be charged for overdrafts maintained longer than 5 days, regardless of balance.

Not satisfied, Senator Chris Dodd is still pursuing a new law that will enforce some limits on all banks.

Proposed legislation

The law introduced yesterday aims to prevent:

more than one overdraft fee per month;

more than six overdraft fees per year;

fees that are more expensive than the cost of processing an overdraft;

banks from manipulating the order in which they post transactions in order to rack up extra fees;

fees if an overdraft is due solely to a bank hold, such as the hold placed on funds when reserving a hotel, if the hold is greater than the actual amount of the transaction; and,

enabling overdraft protection on customers who don’t explicitly sign up for it.

In addition, automated bank systems (SMS, e-mail, etc.), ATMs and bank tellers would be obligated to warn a customer if they were in danger of going negative (presumably with the current transaction), and be given the option to avoid that result.

Analysis

Opt-in

I am all in favor of “opt-in”. I want opt-in everything, but as we saw when Windows Vista was new, it’s maddening to be asked for your permission after initiating every single activity. Some things are perfectly innocent and should be opt-out instead. Frankly, I find it thrilling that for the first time, customers can opt out of overdraft fees. Apparently, it took the threat of new legislation to prod banks into introducing this, so sure, let’s make it all consistent.

Fee instances per year, and per month

One overdraft fee per month and six per year seems arbitrary to me. If I had to guess, I’d say this is related to the fact that banks stand to earn over $38 billion this year on overdraft fees, and they weren’t in danger of losing anywhere near that much from accounts which went negative and then stayed that way.

But I’m enough of a capitalist to admit that it seems wrong to limit profits just because it can be done, which this seems to smack of. When the full text of the bill is available, I’ll try to find more about where these numbers came from.

Fees more expensive than the cost of processing

To be sure, it’s part of a bank’s operation to process an overdraft, deal with a negative account, and pay the salaries of people who write the software and maintain the literal and figurative machinery.

But as was explained to me while working the phones at Bank of America, part of the fee is also meant to dissuade the customer from going negative, and failing that, to encourage the customer to bank elsewhere. Clearly, the fees are adding up to lavish profits at the expense of probably-well-meaning customers. In my opinion, it’s simply not right to profit because someone else fails, especially when that someone is your customer.

Manipulating the order of posting items to create extra fees

This should be obvious as a disgusting practice performed by a heartless behemoth of a corporation.

Overdraft fees because of a bank hold

This also seems like common sense. If a hotel has reduced your available balance by $250 when you’re only going to be paying $110, it’s unreasonably for the bank to punish you for being overdrawn. You had no intention of spending more than you have.

The same is true if there’s a hold placed on a deposit. I’m sure the vast majority of deposits that have holds placed on them end up being legitimate, probably at least 98%. A check made out to you isn’t the same as cash, but why not give your customers the benefit of the doubt, or at least avoid punishing them when you don’t and you end up being wrong?

Warning customers who are in danger of going negative

This just seems like excellent customer service. If a bank truly finds it inconvenient to process overdraft fees, they’d all be doing this today.

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by Smithee.

Smithee, first, I want to touch on your comment about how it’s not right to profit because someone else fails. You and I have access to free checking because someone else is paying the freight. I’m fairly certain that if the banks are severely limited in charging overdraft fees, you and I will have to pay for it. And I WON’T go out on a limb and say that I am willing to pay more for certain services so that someone who can’t manage their finances won’t be charged as much.

I think some parts of the legislation are better than others. I’d say limiting the fees to once per day is appropriate… that way, the order in which transactions are cleared aren’t even an issue. Covering overdrafts *is* a service to the customer. In the old days, a bank would simply bounce a check and charge you a nasty fee for it. Also, I just went shopping at the grocery store the other day, and Harris Teeter now charges $50 for each returned check. (That’s $50 plus what your bank would charge.) Ouch. And at the apartment I rented in college (decent place, not a slum) if you bounced a check, you could forget about paying your rent by check again.

I am for the parts of the legislation that say a bank can’t count “holds” (or whatever you want to call it) against you. And as far as paper checks clearing — a deposit should be a deposit.

I’m all for letting the banks profit. Let them clear transactions and make some money. Perhaps a better compromise is a single daily charge (say $30) and then a smaller, per item fee (say $5.)

You are exactly right in your first paragraph. Even if we ignore the glaring elephant in the room called “personal responsibility” that says that people that don’t like overdraft fees should manage their money responsibly and not overdraft their accounts then there is still the issue that the banks are providing a legitimate service to account holders in covering all of those overdraft charges and should be compensated. When someone overdrafts their account by $100 then that $100 has to come from somewhere. It is perfectly reasonable for the bank to charge a fee for the overdraft service.

This may be off topic, but, PNC (and National City) also offers “Opt Out” for accountholders; they have to call though to opt out. Also, think about the impact this could have on credit unions and regional and small banks that offer rewards checking accounts with high yields. It could mean less profit for all banks, and lesser rewards for consumers.

As a banker, I believe this proposed legislation with have some dramatic negative side effects that are not being discussed. While yes, this legislation will be good for the consumers who continually live beyond their means and and are constantly overdrawn, however, if this is passed, as a business owner also, it is likely that I will refuse to take checks period.

The $38 billion that banks will be making on OD fees pale in comparison to the probably double that the individual business would make off returned check fees. At our bank, the philisophy has always been that if you are gonna overdraft do you want to pay us $24 for taking the chance on you clearing it up or would you rather get your electricity turned off and pay the $150 reconnection fee or have your name on a “do not take checks list” at the local grocery store. In addition, the business owners in our area are not set up to collect these bad debts very well. THe last thing they want is a bad check.

Our governments efforts to shield the “uneducated” consumer from theirselves is only pushing business to the edge of bankruptcy. No one forces the consumer to overdraft an account. Financial prosperity is not hard. SPEND LESS THAN YOU EARN!!!!

So where do you draw the line. What’s to say banks can’t charge a $500 overdraft fee for buying a $2 burrito? I understand people need to be responsible, but the way the banks are approaching this is the equivalent of giving someone life in prison for stealing a pack of gum. Does it seem fair if you have a $98 balance in your account and then you make transactions of $98, $1, $1, $1, and $1 that you will incur overdraft fees of $140? I don’t think so.

I agree with Scott it is getting ridiulous. Also, banks can manipulate holds, authorizations and post dates to generate more fees as well. To the bad check policy you can still overdraft on checks, electronic checks, and automatic payments according to the legistlation. So you won’t get your lights turned off or pay a bad check fee. Finally, all the legislation is doing is allow people to opt out of this “serivce.” Before you had to have it and why? Because it generates billions for banks. If banks really wanted to support personal responsibility they would not allow overdrafts at all to force poeple to be responsbiile. This is a profitable practice that was forced on people, the bank does not have to cover these transactions. If the people truly just wanted to be irresponsible and not care they would simply keep the overdraft protection. Another word on personal responsibility, the banking industry does not often practice it. TARP money is the sign of a huge bank overdraft that the American people had to pay. Finally, there are many class action lawsuits (some friviolous, some not) that have shaped banking regulations over the years because THEY HAD TO because banks will not behave. The legislation is not banning the practice, its giving the people the option of whether to engage in it.

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